COSTAR - Gary Marr

A pair of Toronto-based stock market analysts suggest the publicly traded real estate investment trust market is creating opportunities for investors as pricing diverges among asset classes and deviate from private markets.

"The bifurcation in REIT returns presents opportunities," according to a report from Canaccord Genuity Corp. analysts Mark Rothschild and Zachary Weisbrod issued this week.

"Real estate operating companies are trading at a 15.3% discount to their net asset value compared to 9.8% at the end of 2022"

"While the overall flat performance suggests that it has been a quiet year for Canadian REITs, returns have been heavily bifurcated by asset class. Industrial and residential REITs have posted the strongest total returns" with industrial at 12.5% and residential at 10%, Rothschild and Weisbrod said in the report. Office and retail REITs have posted the weakest returns with office at negative 16.5% and retail at negative 8.7%.

The valuation of public REITs continues to take a pounding south of the border, with S&P Global Market Intelligence reporting last week that the median implied capitalization rate for U.S. equity real estate investment trusts was up 44 basis points in the second quarter to 8.2%, the fifth consecutive quarter of expanding implied capitalization rates and the highest level since 2010.

Much like Canada, U.S. office REITs are bearing the brunt of the beating from investors with an implied capitalization rate of 11.1%, a 2.8 percentage point jump year over year. The self-storage and industrial REIT sectors finished the quarter with the lowest median implied capitalization rates with self-storage at 5.5% and industrial at 6%, according to the report. The residential sector was at 6.1%.

In a second-quarter investment activity has remained muted and created a softer-than-expected first half of the year as private investors continued to account for the majority of sales volume and institutional capital stayed on the sidelines.

The market has become increasingly bifurcated with high-quality assets seeing the best liquidity while the more troubled sectors are facing financing challenges and tighter credit conditions.  The national capitalization rate for all properties in Canada was at 6.28%.  In the second quarter, the property type with the worst cap rate in Canada was Class B suburban offices at 8.33% while Class A multifamily properties had the best at 4.08%.

Genuity's Rothschild and Weisbrod maintain the REITs and real estate operating companies they cover are trading at a 15.3% discount to their net asset value compared to 9.8% at the end of 2022. The pair noted the S&P/TSX Capped REIT Index has returned negative 0.2%, compared to 7% for the S&P/TSX Composite Index and 5.2% for the U.S. MSCI REIT index.

"All Canadian office REITs have posted negative returns year-to-date as fundamentals have yet to show signs of bottoming," said the report.

The implied cap rate on Canadian office REITs also continues to rise and was 8.03% at the end of August, which compares with an international financial reporting standard or IFRS cap rate of 4.9% — the widest gap of any asset class. Canadian industrial REITs are trading at an implied 6.21% cap rate compared to a 5.99% cap rate, according to the report.

Despite the change in stock market prices, the analysts noted since the end of 2022 they have yet to make significant adjustments to their financial outlook. For 2024, they have only adjusted funds for operations, down 0.1% on average for REITs they cover.



The Apartment Group

"The Dogs Days of Summer" are now coming to a close.  What is the shape of the real estate investment market?   We have now been in this new market of much higher interest rates for almost 12 months.  It is clear that the office and retail sectors are in tough times with people not going back into the office full time and retail player having supply chain issues and staffing problems.  Vacancies in both these verticals are going up which means values are falling.  How long this will continue is anyone's guess.  While there are certain market drivers here influencing retail and office, there are also more deeper structural and cultural issues here at play.  It may be that these two sectors will have to "re-invent" themselves in order to survive.  This too will have impacts on transportation linkages and housing.

The Land market is basically at a virtual standstill.  Many developers are not selling at levels enough to justify construction loans and hence construction.  The ability of new home buyers getting or even qualifying for mortgages in today's climate is a huge challenge.  While home values have maintained their own thus far, it is not clear they will continue to do so even with massive immigration coming in.

The apartment market, which is our focus, is not with out influence regarding current market conditions and the impact of much higher lending rates and much lower loan to values being afford buyers and those refinancing.  Generally speaking, apartment values have held relatively steady in the past 18 months and this is mostly due to the massive rise in rental rates given the huge demand for suites and the severely limited supply of them available for lease.  Cap rates are moving up but so are the Net Incomes.  We are not sure how long this will continue.

We all know that sales volumes in the apartment sector are down.  But let's put that into perspective.  The Apartment Group looked as the apartment sales market between June 1 and August 31 for 2022 and 2023.  This is a good indicator of activity as interest rates just started to go up in late spring 2022 so these closing in the summer are "pre-interest rate hike deals".  In the summer of 2022 there were about 27 apartment closed deals over $3.5MM (we used this as the cut off) with a value over around $900MM.  In 2023, there were about 14 apartment closed deals with a value of around $300MM.  This is a huge reduction in sales volume.  In fact the $300MM number include one portfolio sale of around $100MM on its own.

The lack of deals closing is not a direct result of softening demand.  Demand is still strong.  It the availability of credit and the cost of it that is greatly impacting the majority of the apartment market which are those smaller players and medium sized owner investors who buy the bread and butter stuff 15-70 suites.  The larger players are still active and can underwrite their deals more easily.  The real challenge is for the buyers and sellers of the 15-70 suite buildings to more creative in doing deals and keeping deals alive.

As a smart scientist once said "progress comes from doing things differently".  The apartment is still the most preferred and save asset class to be in.  Rents will continue to rise - but we need to do things differently in order to make deals happen.









Asking rents in Canada continued to hit new highs in September, increasing by 1.5% from August and by 11.1% from a year ago to an average of $2,149. With year-over-year growth rising back into double-digits, the annual rate of rent inflation accelerated to a nine-month high.  While rent increases remained exceptionally strong in most major markets during September, the annual rate of rent growth slowed substantially in Toronto last month, which may signal a broader impending moderation for rent inflation in the months ahead as the economy cools and renters face mounting affordability constraints. This was visible in the sharp rise in rental activity for shared units.

Asking rents for purpose-built and condominium apartments averaged a record high $2,078 in September, increasing 1.6% month-over-month and 13.3% year-over-year. One-bedroom apartments recorded the fastest annual growth in asking rents of 15.5% to reach $1,905. Two-bedroom apartment rents rose 13.1% from a year ago to an average of $2,268, while three-bedroom rents were up 11.4% annually to an average of $2,514. The least expensive apartments, represented by studios, recorded annual rent growth of 11.3% to reach an average of $1,511.

Among Canada’s largest markets with a population of at least one million, Calgary maintained its lead with annual growth in asking rents for purpose-built and condominium apartments of 14.3% in September, reaching an average of $2,091. Rent increases in Montreal also stayed in the double-digits last month as average asking rents rose 10.2% year-over-year to $2,030.

Each of the six largest markets experienced a slower rate of annual growth in asking rents for purpose-built and condominium apartments last month when compared to August. However, the deceleration was most pronounced in Toronto, where rent growth slowed from 8.7% to 2.3% — the slowest annual rate of increase in two years. On a month-over-month basis, rents in Toronto were largely unchanged (+0.1%).


Given the slowdown in the market relating to sales.  We will be turning to a quarterly sales update moving forward until further notice.


Together the team has completed over 1,500 transactions and has sold over $7.0 billion in apartments and development land. Put us to work for you and see the results. NO ONE has sold more buildings than our group. Experience, knowledge and professionalism will insure you get the right deal or the highest price if you are selling.

The Apartment Group is a dedicated team of professionals specializing in the sale of multi-residential investment properties. With over 40 years of combined experience, the team brings together their strengths including strong negotiation and sales skills along with highly technical market analysis and appraisal methods.

We are a boutique Brokerage but have the capabilities of the larger houses without the overhead. We have: an internal database of over 10,500 active apartment and land Buyers; a list of all apartment building owners in the Greater Toronto Area; our web site gets over 50,000 hits a month; we highlight properties for sale through our newsletter which reaches 10,000 investors monthly.


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